1. FYI on how the GOP’s TCJA affects your ITR AFAIAA
FYI on how the GOPS’s Tax Cuts & Jobs Act affects your Income Tax Return As Far As I Am Aware. There are still several issues that are unclear. So they are either open to interpretation or we will have to wait until further IRS guidance is received.
Asian American Chamber of Commerce Tax Luncheon
Bing Chen, CFA, CFP® Vice President / Private Wealth Assistant Regional Manager
February 21, 2018

2. The avoidance of taxes is the only intellectual pursuit that still carries any reward. ~ John Maynard Keynes
Today I will cover some of the more common issues that we are helping our clients plan around here at UMB. We certainly don’t have time to cover every provision or discuss every nuance so consult with your tax advisor for additional information.

3. IRA Recharacterizations
Let’s start with a change in a common strategy that clients may have been using to minimize their tax liability in certain circumstances – the IRA Conversion and Recharacterization strategy.

4. IRA Recharacterizations
IRA conversions are still allowed. But the ability to recharacterize or “undo” the conversion has been largely eliminated. In a conversion, you typically convert a Trad IRA to a Roth IRA by paying ordinary income tax on the conversion amount, assuming it was all pretax money. So let’s say you had a $1mm Trad IRA that you converted to a Roth IRA. Several months later, the investment declines significantly in value and is now down to $700,000. You originally paid tax on the $1mm converted amount. What you could have done prior to TCJA is recharacterize that conversion and essentially undo it to put that $700,000 back into your Trad IRA. Then, do another IRA conversion on the $700,000 so that you only end up paying tax on the $700,000 instead of the $1mm but the end result is essentially the same. You end up with $700,000 in your Roth IRA but you paid much less tax. Of course the hope is that the investment recovers in value at some point.

5. Who is this and what is he known for?
Sherlock Holmes – Power of Deduction

6. A Different Power of Deduction
While it might take powers of deduction to try and understand the tax code, in this case I’m referring tax deductions. A number of changes have occurred to which deductions are allowed and how some of them work.
Let’s discuss some of the changes that have been made and then we’ll cover some planning strategies in light of these changes.

7. Standard Deduction and Personal Exemption
2017
2018
Single
$6,350
$12,000
Married Filing Joint
$12,700
$24,000
Standard deduction nearly doubles from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 if Married Filing Joint. Personal Exemptions have been eliminated for The implication is that many more people will simply use the standard deduction rather than itemizing deductions.
Itemized deductions have not been eliminated, but have been significantly scaled back.
Personal Exemption
2017
2018
Exemption Amount*
$4,050 $0
* Subject to phase out.

8. SALT (State and Local Taxes)
State and Local Taxes are now capped at $10,000. This includes income and property taxes. This could have a profound impact on wealthy taxpayers in high tax states that own multiple homes.

9. Miscellaneous Itemized Deductions Subject to 2% of AGI – Bye Bye
The entire category of 2% of AGI Miscellaneous itemized deductions have been repealed, essentially leaving us with something that doesn’t taste quite so good.
This list of deductions in this category was quite extensive, but the biggest things for us is…

10. Tax Prep & Investment Advisory Fees
…the deduction for tax preparation and investment advisory fees.

11. Tax Prep & Investment Advisory Fees
…the deduction for tax preparation and investment advisory fees.

12. Mortgage Interest Deduction
There were a number of changes to the deductibility of home mortgage interest.
The deductibility of home mortgage interest is dependent on how the mortgage proceeds are used, not by the specific type of loan. To be considered acquisition indebtedness, the proceeds must be used to acquire, build, or substantially improve the residence and the loan is secured by that residence. Refinancing can still be considered acquisition indebtedness so long as the original loan was also acquisition indebtedness and the refinancing was for the remaining balance on that loan.

13. Acquisition Indebtedness
Assuming the loan is considered Acquisition Indebtedness, the interest is deductible only mortgage principal of $750,000, down from $1 million. The good news is that there is a grandfathering clause so that existing mortgages prior to the tax law change are still deductible up to $1 million. New mortgages, however, will be subject to the new, lower limit.

14. Acquisition Indebtedness
Assuming the loan is considered Acquisition Indebtedness, the interest is deductible only mortgage principal of $750,000, down from $1 million. The good news is that there is a grandfathering clause so that existing mortgages prior to the tax law change are still deductible up to $1 million. New mortgages, however, will be subject to the new, lower limit.

15. Home Equity Indebtedness
If the mortgage is not considered Acquisition Indebtedness, then it will be considered Home Equity Indebtedness and there will be no deduction allowed going forward. In prior years up to $100,000 of home equity indebtedness was deductible was well. There is no grandfathering clause for this one. If you tap into your home’s equity to consolidate credit card debt, purchase a car, do a cash out refi, or just use the money to maintain but not substantially improve the home, that debt or portion of that debt would be considered home equity indebtedness and there will be no deduction allowed.

16. There is a ray of light!

17. Gift and Estate Tax Exemption Doubles
For high net worth families concerned about gift and estate taxes, they received a nice reprieve. The TCJA effectively doubles the exemption amount from about $5mm to $10mm (with inflation adjustment), per person.

18. Medical Expenses over 7.5% of AGI
One deduction that was expanded is the medical expense deduction threshold which was extended for another year at 7.5% of AGI rather than reverting back to the 10% threshold.

19. Charitable Deduction up to 60% of AGI
Another deduction that was slightly expanded is the deduction of cash to public charities which was increased to 60% of AGI, versus 50% previously.

20. Pease Limitation Suspended
The TCJA also eliminated the Pease Limitation which reduced the value of itemized deductions for high income taxpayers. This could allow high income taxpayers who make sizeable charitable contributions to deduct more of those contributions than they had in the past.

21. But not in exchange for college athletic event seating rights.
But there will be no charitable deduction for payments made in exchange for college athletic event seating rights.

22. Planning Strategy
With the combination of higher standard deductions and significantly curtailed itemized deductions, what are the planning opportunities to minimize taxes? One strategy is to try and bundle your itemized deductions into certain years so that the total exceeds the standard deduction in those years.

23. Bundle Itemized Deductions
Exceed Standard Deduction
Charitable
Medical
SALT
For example, if you have a year where you have high medical expenses, you could bundle them with SALT that are assessed, and also make sizeable charitable contribution to a Donor Advised Fund which in total would exceed the standard deduction in that year. Using a DAF will allow you to take the charitable deduction up front but allow you to spread your giving to other charities at your discretion.

24. December 31, 2025
In the end, however, many of the provisions in TCJA are scheduled to sunset at the end of 2025.

25. Disclosure and Important Considerations
UMB Private Wealth Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services, Inc. is a wholly owned subsidiary of UMB Financial Corporation. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation. Banking and trust services offered through UMB Private Wealth Management, a division within UMB Bank, n.a. Securities offered through UMB Financial Services, Inc. member FINRA, SIPC, or the Investment Banking Division of UMB Bank, n.a. Insurance products offered through UMB Insurance, Inc. You may not have an account with all of these entities. Contact your UMB representative if you have any questions. This report is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Private Wealth Management and the information available at the time this report was published. All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Private Wealth Management obtained information used in this report from third party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Private Wealth Management does not guarantee that it is accurate. All investments involve risk, including the possible loss of principal. This information is not intended to be a forecast of future events and this is no guarantee of any future results. Neither UMB Private Wealth Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report. “UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © UMB Financial Corporation. All Rights Reserved.
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“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © UMB Financial Corporation. All Rights Reserved.